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Global Credit Research - 14 Jul 2010
London, 14 July 2010 -- Moody's Investors Service has today assigned a Ba1 corporate family
rating (CFR) and a Ba1 probability of default rating (PDR) to JSC Interregional
Distribution Grid Companies Holding ("IDGC Holding"),
the ultimate holding company for 11 region-focused distribution
grid businesses, which essentially form the Russian power distribution
grid sub-sector. The rating outlook is stable. At
the same time, Moody's Interfax Rating Agency, which
is majority-owned by Moody's, has assigned an Aa1.ru
national scale credit rating (NSR) to IDGC Holding.
According to Moody's and Moody's Interfax, the Ba1 global
scale rating reflects Moody's expectations with regard to IDGC Holding's
global default and loss, while the Aa1.ru NSR reflects the
standing of the company's credit quality relative to its domestic
The Ba1/Aa1.ru CFR assigned to IDGC Holding incorporates:
(i) a moderately risky business profile given its position as a regulated
monopoly operating in Russia's emerging regulatory environment;
(ii) a relatively conservative but evolving financial profile; and
(iii) a two-notch uplift for potential support from its majority
shareholder, the Russian Federation. Moody's assessment
of a moderately risky business profile of IDGC Holding factors in the
higher risk of its subsidiaries' regulated grid monopoly businesses
in Russia compared with the generally low business risk profiles of peers
operating in developed markets. More broadly, Russia's
immature business environment also contributes to the business risk assessment.
The stable rating outlook reflects Moody's belief that IDGC Holding
should be able to maintain a financial profile commensurate with its current
The Ba1/Aa1.ru CFR is based on the consolidated business and financial
profile of IDGC Holding and the businesses within the group, and,
as such, reflects the consolidated group's credit profile
and ignores priority of claim. Moody's notes that the majority
of the group debt is located at the operating subsidiaries' level
and that the claims of creditors of IDGC would be subordinated to those
of operating subsidiaries' creditors.
The group's CFR and the ratings within the group (MOESK and Lenenergo,
two Ba2/STA-rated operating subsidiaries) are influenced by the
rating of the group's majority shareholder, the Russian Federation,
although to a different extent. IDGC Holding's operating
subsidiaries, including those that are rated, are supported
by the state mainly through the holding company. As a result,
IDGC Holding's CFR factors in a higher state support assumption
(equivalent to a two-notch uplift) than that incorporated into
MOESK's and Lenenergo's ratings (equivalent to a one-notch
uplift). At the same time, the group's financial standing
is largely determined by a few operating subsidiaries, including
those that are rated, which service relatively wealthy regions and
account for the major part of the group's revenue, EBITDA
and cash flow, investment and debt burden. The holding company's
financial resources are relatively low. However, Moody's
expects limited growth of external debt (currently, there is none)
at the holding company level in the medium term, which is a consideration
for the rating agency's assessment of the stand-alone credit
quality of the consolidated group and that of its strongest subsidiaries
as currently broadly comparable.
Moody's assessment of IDGC Holding's moderately risky business
profile positively reflects: (i) its subsidiaries' position
as the monopoly distribution grid businesses in Russia; (ii) advantages
of the geographical diversification of its operations; and (iii)
a generally supportive tariff regulation, which recognises the importance
of the group's business for both the whole economy and regional
development. The Russian government is working on introducing greater
transparency and stability to the country's regulatory framework,
including the roll-out of a Regulatory Asset Base (RAB)-based
regulation across all regions to enable IDGC Holding's subsidiaries
to invest in their asset base.
At the same time, Moody's notes a number of challenges facing
the group, including: (i) an evolving regulatory framework
in the domestic distribution grid sub-sector, which sees
the main parties under common government guidance and influence;
(ii) the very short track record of IDGC Holding's operations in
the group's current configuration, and of its management's
policy, as well as some uncertainties surrounding the consolidation
of the electricity distribution sub-sector under IDGC Holding's
management; (iii) a large capital investment programme, required
by the group subsidiaries' largely outdated assets, which
involves a degree of execution risk and will challenge the group's
financial profile and liquidity management.
In Moody's view, the evolving regulatory environment and the
limited track record of IDGC Holding's operations in the group's
current form represent the key risks in the context of the assessment
of IDGC Holding's business profile. The new RAB-based
regulation has yet to be fully introduced and Moody's notes that,
given the current market and regulatory structures, the main role
of economic regulation at the moment is to achieve government policy goals.
Given the distribution grid sub-sector's 30% contribution
to total tariffs for consumers, the sensitivity to higher grid tariffs
driven by the RAB regulation is high and, going forward, these
will remain subject to political interference at both the federal and
regional government level in the process of the introduction and monitoring
of the regulation, especially at times of difficult economic conditions.
At present, Moody's does not expect the introduction of the
new system of tariff regulation to weaken IDGC Holding's consolidated
operating cash flow below current levels. However, the rating
agency remains concerned about whether the regulation can reasonably strengthen
the cash flow generation of IDGC Holding's subsidiaries, and
thereby enable the group to finance its investments without raising a
substantial amount of debt in the short to medium term.
IDGC Holding's consolidated financial profile is currently relatively
conservative, with a debt/EBITDA ratio of approximately around 2.1x
and a funds from operations (FFO)/net debt ratio of around 40%
in 2009 (all ratios incorporate Moody's standard adjustments).
Although strong for a Ba rating in the broad international context,
Moody's considers the group's metrics to be appropriate for
a business operating in a regulatory environment that is difficult to
predict. Given its substantial investment programme for 2010-2012
of approximately RUB380 billion, the group's leverage may
Moody's notes a risk of pressure on the liquidity of IDGC Holding's
subsidiaries in the context of the group's relatively limited flexibility
with regard to its investment programme, covenants in credit facilities
and liquidity management policy. The latter largely relies on the
group's status as a state-controlled monopoly and its established
relationships with state-owned banks and does not necessarily require
funding needs to be addressed far in advance.
Moody's positively notes that IDGC Holding has access to state support
in the normal course of its business, ranging from direct funding
of the group's involvement in the strategic state projects (e.g.
associated with the 2014 Winter Olympic Games in Sochi) to state-encouraged
general agreements between IDGC Holding's and state-owned
banks to support the group's investments and liquidity needs.
The rating agency also takes comfort from management's stated commitment
to pursue a conservative financial policy, although this may be
difficult to achieve going forward as a result of the evolving regulatory
framework and the group's investment needs.
For IDGC Holding to maintain the current rating, Moody's would
expect the group's FFO/interest coverage ratio and its FFO/net debt
ratio to remain above 3x and above 20%, respectively.
As the Russian governments currently owns a 52.68% stake
in IDGC Holding and is closely involved in the grid sub-sector's
development, Moody's considers the group to be a government-related
issuer (GRI). In accordance with Moody's rating methodology
for GRIs, the Ba1 CFR incorporates an uplift for the state's
potential support to the group's stand-alone credit quality,
measured by a Baseline Credit Assessment (BCA) of 13 (on a scale of 1
to 21, where 13 is equivalent to a Ba3). The uplift is driven
by the credit quality of the Russian government (rated Baa1/STA) and Moody's
assessment of a high probability of state support in the event of financial
distress, as well as high default dependence between the group and
Moody's assessment of high dependence factors in both IDGC Holding's
focus on the domestic market and the probability that, if the state
were in financial distress, the group's business and financial
standing would be affected. The rating agency's assumption
of high support reflects (i) the shareholder structure and the government's
involvement in the group's management; and (ii) the strategic
importance of the group as a provider of essential utility services.
This is the first time that Moody's has assigned a rating to IDGC
The principal methodologies used in rating IDGC Holding were "Regulated
Electric and Gas Networks Rating Methodology", published in
August 2009, and "The Application of Joint Default Analysis
to Government-Related Issuers", published in 2005,
which are available on www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Headquartered in the city of Moscow, IDGC Holding is the holding
company for 11 core operating subsidiaries, which are regulated
monopoly interregional distribution grid businesses operating in 69 regions
of Russia. The regions cover 45% of the Russian territory,
where around 87% of the country's population lives.
In 2009, the group's consolidated revenue amounted to RUB461.7
billion (US$14.6 billion). A 52.68%
stake in the group is owned by the Russian government.
NATIONAL SCALE RATINGS
Moody's Interfax Rating Agency's National Scale Ratings (NSRs)
are intended as relative measures of creditworthiness among debt issues
and issuers within a country, enabling market participants to better
differentiate relative risks. NSRs in Russia are designated by
the ".ru" suffix. NSRs differ from global scale
ratings, as assigned by Moody's Investors Service, in
that they are not globally comparable to the full universe of Moody's
rated entities, but only with other rated entities within the same
ABOUT MOODY'S AND MOODY'S INTERFAX
Moody's Interfax Rating Agency (MIRA) specialises in credit risk
analysis in Russia. MIRA is controlled by Moody's Investors
Service, a leading provider of credit ratings, research and
analysis covering debt instruments and securities in the global capital
markets. Moody's Investors Service is a subsidiary of Moody's
Corporation (NYSE: MCO). Further information is available
MD - Infrastructure Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Vice President - Senior Analyst
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
Moody's assigns Ba1 rating to IDGC Holding; outlook stable
No Related Data.
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